FOREX TRADING

An Analysis of the Volatility Index (VIX) over the past 15 Years

Many investors have wondered whether extremely low or high readings in the Volatility Index (VIX) have always given a strong signal as to when the market may be nearing a bottom or top. A plot of the VIX versus the S&P 500 back to 1986 is shown below.

From what I can see the VIX was rather volatile from 1986-1990 especially when the market crashed in 1987. Then from 1991 through 1994 the VIX was pretty stable as the market traded nearly sideways. Meanwhile as the market started to rally strongly beginning in 1995 the VIX gradually became more volatile again by 1997 and has continued to be volatile ever since with strong fluctuations both to the downside and upside. The question is will the VIX eventually transition to a less volatile environment like occurred in the 1991 to 1994 time period when the market began to trade sideways or will it continue to see more strong fluctuations in the future?

If we break down the past 15 years into separate time periods and start with the past 5 years there has been a fairly strong correlation between a rapid drop or rise in the VIX and a nearing market top or bottom. Some examples of nearing bottoms associated with a quickly rising VIX have occurred at points A, B and C and to a lesser extent at points D and E. Meanwhile as the VIX has approached a very low level a nearing market top has occurred at points F, G, H and I over the past 5 years.

Meanwhile from the period of 1991 through 1994 the market traded nearly sideways as the S&P 500 only gained about 75 points during that 4 year period. During this period of time the VIX was pretty stable and really didn’t move strongly in either direction.

Looking further back from 1986 to 1990 the VIX was more volatile and did do a good job of signaling a nearing top before the market crashed in 1987 (point J) and also was at a fairly low level before the market sold off in 1990 (point K). Meanwhile as the VIX spiked sharply higher (point L) with the market crash in 1987 this did help signal a nearing bottom which eventually led to a longer term up trend until the market peaked in the Summer of 1990.

Overall it looks like the VIX has been pretty useful since 1998 with all of the market swings to the downside and upside while in the early to mid 1990’s it wasn’t that useful as the market traded basically sideways. In the mid to late 1980’s there were a few times when it was useful especially when the market was nearing a significant bottom or top.

The Importance of Identifying Favorable Stock Chart Patterns

To be a successful investor it’s important to look for those stocks which are forming a favorable chart pattern such as a "Cup and Handle", "Double Bottom" or "Flat Base". In 2002 some of the best performing stocks exhibited the above mentioned chart patterns before breaking out and undergoing significant price appreciation.

Here are a few stocks that exhibited a "Cup and Handle" pattern before breaking above their Pivot Points on strong volume. CBZ formed a 7 month Cup from July of 2001 until February of 2002 and then developed 3 week Handle (H) before breaking above its Pivot Point in early April on strong volume. After breaking out of its Handle CBZ appreciated nearly 155%.

FSTW formed a 1 year Cup from January of 2001 until January of 2002 and then developed a 9 week Handle. FSTW then broke out of its Handle and above its Pivot Point in April accompanied by strong volume. After breaking out of its Handle FSTW appreciated nearly 225% over the next few months.

HL formed a shallow 9 month Cup from May of 2001 until February of 2002 and then developed a 4 week Handle (H). It then broke out of its Handle and above its Pivot Point in late March on good volume. After breaking out of its Handle HL gained nearly 275% over the next few months.

MWRK formed a 5 month Cup from September of 2001 into the early part of 2002 and then formed a 4 week Handle (H). MWRK then broke out of its Handle and above its Pivot Point in early March. After breaking out of its Handle MWRK gained nearly 200% over the next several months.

Another chart pattern to look for is the "Double Bottom" which looks like the letter "W". Here is a stock (CFI) that formed a Double Bottom pattern from May of 2000 into the early part of 2002 and then developed a small 3 week Handle (H) before breaking out in March accompanied by strong volume. After breaking out in March CFI gained nearly 170% over the next four months.

The third type of chart pattern to look for is called a "Flat Base". Flat Bases form as a stock basically trades sideways for several weeks or months. CVU formed a Flat Base for nearly 6 months before breaking out in April on good volume and appreciated over 300% over the next few months.

TENT is another example of a stock which formed a Flat Base for 10 months before breaking out in the early part of 2002. After breaking out TENT appreciated nearly 450% over the next 6 months.

These are some of the chart patterns you should be looking for when deciding which stocks to invest in. Investing in a stock which doesn’t have a favorable looking chart pattern can lead to poor performance while other stocks which are breaking out of a favorable chart pattern ("Cup and Handle", "Double Bottom" and "Flat Base") undergo significant price appreciation. Also if you examine the stocks mentioned above they all broke out of a favorable chart pattern on strong volume as well.

Using the 10 Day Moving Average of the VIX (Volatility Index) to time a Reversal in the the S&P 500

Investors can get an idea of when the market may reverse when the 10 Day Moving Average (MA) of the Volatility Index (VIX) becomes significantly stretched away from its 10 Day Moving Average (MA). A simple example is shown below which compares the 10 Day MA of the VIX to the S&P 500.

Notice when the VIX got stretched significantly away from its 10 Day MA (blue line) to the upside (points A) that the S&P 500 made a bottom (points B) and then reversed to the upside.

Thus keeping track of where the Volatility Index is in relation to its 10 Day Moving Average can give investors a clue to when the market may be getting close to a near term bottom and possible upside reversal.

Stocks that act well while the Market is selling off may give you a clue to new Leadership

Over the past few years many investors have given up on the market especially when another round of selling has occurred. However this is exactly the wrong time to give up on the market because when the market reverses to the upside those stocks which had been acting well during the sell off may become the next big winners.

Here are a few examples of what I’m talking about. Let us compare the charts of HITK and USNA with the chart of the S&P 500 this past Summer and Fall when the market was selling off.

Looking at HITK first shows that this past Summer and Fall while the S&P 500 was dropping (points A to B) HITK was actually rising (points C to D) while completing the right side of a 1 1/2 year Cup. HITK then traded sideways for 4 weeks while developing a Handle (point E) and then broke out in late October. After breaking out HITK nearly doubled in price over the next few months before topping out in early January.

Now let us compare USNA with the S&P 500. USNA formed a 2 1/2 year Cup from the early part of 2000 until June of 2002. When the S&P 500 began to sell off last Summer and Fall USNA basically traded sideways during that period of time while developing a 4 month Handle from July through September. Then when the market made a bottom in early October and began to rally USNA broke out of its Handle on huge volume (point F). After breaking out in early October USNA then doubled in price over the next three months.

As you can see noticing which stocks are acting well when the market is selling off can give you a clue to whom the next leaders will be when the market begins to reverse strongly to the upside.

Shorting a stock is the exact opposite of buying a stock. When you short a stock you are hedging your bets that the stock will go down in price unlike when you buy a stock and believe the price will go up. In order to short a stock you must have a margin account with your brokerage firm. In addition you also have to short individual stocks on an up tick but can short the Exchange Traded Funds (ETF’s) on a down tick. Thus as an investor you have more of an advantage shorting the ETF’s than individual stocks.

Many investors try and short a stock way to early as they believe the stock price is way overvalued. However many times a stock that is overvalued in price may become even more overvalued especially when the stock market is in an extended upward move. The proper time to short a stock is after it has encountered its first strong downward thrust and bounced for a short period of time which sets the stage for a second move to the downside.

Lets look at an example. NTES which made a huge move in 2003 eventually peaked in October of 2003 and then made its first strong downward thrust (points A to B). Notice how NTES then found support near its 200 Day EMA (purple line) and 50% Retracement Level near the $40 level. After finding support near the $40 level NTES then rallied on below normal volume but encountered resistance at its 100 Day EMA (green line) and 38.2% Retracement Level near $48 (point C). This set the stage for a second short opportunity as NTES began to stall out near the $48 level. In this example NTES could have been shorted around the $48 level with a Stop Loss Order placed just above the $50 level just in case NTES broke to the upside instead. During the month of December NTES fell from $48 to $35 a share but did find support just above its 61.8% Retracement Level which was near $34 (point D). Thus investors could have covered their short positions at one of two prices with the first at the 200 Day EMA near $40 and the second near the 61.8% Retracement around the $34.

Thus I believe the best time to short a stock is to wait for it to bounce after it makes its first major thrust downward, after going through an extended upward move, and then try and catch the second move downward. When looking for stocks to short make sure they are exhibiting these three characteristics.

1. The stock has already undergone one significant move downward after making a top.
2. The stock then finds support at a certain Fibonacci Retracement Level or Moving Average and rallies on poor volume.
3. The stock then stalls out near its 38.2%, 50% or 61.8% Fibonacci Retracement Level or Moving Average after rallying.

By following these simple rules investors will have a much higher success rate when attempting to short stocks.

The Importance of Industry Group Relative Strength

Knowing which Industry Groups the Institutional Money is flowing into and out of is very important to recognize. If your invested in Stocks that reside in low Relative Strength Industry Groups then they may remain poor performers until that Industry Group shows signs of increasing Relative Strength. Sometimes it can take many months or even a few years before an Industry Group will finally begin to show signs of life.

Lets look at a couple of Industry Groups over the past few years and see how they compare based on Relative Strength and Price Performance. The Gold and Silver Sector has been very strong since the first of the year which has been reflected in its Industry Group Relative Strength and Year to Date price Performance.

Notice how this Industry Group was strong in the Fall of 2001 but gradually became out of favor in November and December of 2001 as the Groups Relative Strength dropped to 8 (highlighted in blue). However things began to change by January as the Group’s Relative Strength began to increase and has been very strong since February with values consistently in the 90’s (highlighted in red).

If we look at the individual stocks in the Mining-Gold/Silver/Gems Industry Group all of them have performed well except for one. The Average Year to Date Return for the Group since January 1st is over 130% as of May 24, 2002. This is why it’s important to notice which Industry Groups are starting to show signs of increasing Relative Strength.

Now lets look at a Industry Group (Medical-Generic Drugs) which has been exhibiting low Relative Strength values over the past several weeks. Notice in the table below how this Industry Group was strong in the Fall of 2001 but quickly fell out of favor as the Relative Strength values dropped from 96 in October to as low as 1 by January of 2002 (highlighted in blue). During the past several weeks the Relative Strength values have continued very low (highlighted in red) as this Industry Group has remained out of favor with the Institutional Money.

If we look at the individual stocks that make up this Industry Group several of them have been performing very poorly since Jaunary 1st with an Average Year to Date Return of -16% through May 24, 2002..

We track over 180 different Industry Groups each week as this allows me to notice which Groups are showing signs of decreasing or increasing Relative Strength and where the Institutional Money is flowing into or out of. Recognizing these trends can be very beneficial to investors as typically the best performing Stocks will reside in high Relative Strength Industry Groups as shown by the above examples.

If you go back through the history of the stock market there is a recurring theme among those stocks which have had some of the strongest price appreciation and it’s related to their Sales and Earnings Growth. Let’s look at two companies over the past few years and compare their Sales and Earnings Growth.

First let’s look at Microsoft (MSFT) which has hard meager Sales and Earnings Growth in 2002 and 2003. Since the market made a bottom in October of 2002 MSFT has seen very little price appreciation since then. Back in early October of 2002 MSFT was trading around $22 a share and in late March of 2004 MSFT was trading near $24 a share. Thus while the major averages saw significant gains from October of 2002 into the early part of 2004 MSFT was only up 9%.

Now let’s look at a stock which has been exhibiting strong Sales and Earnings Growth over the past year or so. As you can see below Taser (TASR) has seen accelerating Sales and Earnings Growth over the past two quarters which has been reflected in its stock price. TASR formed a "Cup and Handle" pattern before breaking out in September of 2003 and rose nearly 800% from September of 2003 through mid February of 2004.

As these examples show those companies which have accelerating Sales and Earnings Growth have the potential to perform very well while those with poor Sales and Earnings will languish even in a Bull Market environment. I would imagine those investors who have held MSFT over the past few years aren’t very happy as the stock price has virtually gone nowhere since October of 2002 into the early part of 2004.

The key is to recognize those companies which are starting to establish a trend of accelerating Sales and Earnings Growth before everyone else does which takes a lot of time and research. This is what I do every week as I spend over 20 hours a week looking for companies that are starting to show signs of accelerating Sales and Earnings Growth.

Why Earnings Growth is Important to a Stock’s Performance

If you go back through the history of the stock market there is a recurring theme among those stocks which have had some of the strongest price appreciation and it’s related to their Earnings Growth. If you plot a chart of Earnings Growth versus a companies Stock Price there is a usually a strong relationship between the two.

Here are a few examples over the past few years. First lets look at ELNT and its associated table of Earnings Growth and Stock Price over the past two years.

Meanwhile if we take the table above and make a graphical plot of ELNT’s Earnings Growth versus its Stock Price show a very strong relationship. Notice how ELNT’s stock price (blue line) began to rise significantly as its Earnings Growth (red line) started to accelerate beginning in December of 1999 (point A) and continued through September of 2000 (point B). From September of 1999 until September of 2000 ELNT saw its stock price rise from $9 to over $90 a share for a return of nearly 900%.

Next look what happened as ELNT’s Earnings Growth peaked in September of 2000 and began to decelerate over the next several months. As you can see ELNT’s stock price dropped in unison with its Earnings Growth (points B to C) and eventually gave back much of its gains that had occurred in 2000.

Now lets look at another example which proves that even in a Bear Market stocks can do well if they have strong Earnings Growth. BEL was a company that had major problems with its Earnings Growth in 2000 as shown by the table below. BEL didn’t start to see any positive Earnings Growth until 2001 but when it did finally occur BEL’s Earnings Growth accelerated strongly in the latter half of 2001 into early 2002.

As shown by the graphical chart of the table above BEL’s stock price went nowhere in 2000 (points D to E) as their Earnings Growth remained negative. However as BEL’s Earnings Growth accelerated in 2001 into early 2002 investors took notice as BEL’s stock price exploded in early 2002 (point F to G). Since the Fall of 2001 BEL’s stock price has risen from around $4 to over $20 a share for a return of 375% even in a negative market environment.

As these examples show regardless of market conditions companies which have strong accelerating Earnings Growth have the potential to perform very well until their Earnings Growth begins to decelerate. If you don’t believe this go back and research some of the best performing stocks of all time and a majority of them will exhibit similar characteristics.

The key is to recognize those companies which are starting to establish a trend of accelerating Earnings Growth before everyone else does which takes a lot of time and research. This is what I do every week as I spend over 20 hours a week looking for companies that are starting to show signs of accelerating Earnings Growth. This is how I found BEL and ELNT well before their stock prices took off.

From a historical perspective since 1900 there have been 3 Secular Bull Markets and 3 Secular Bear Markets as shown by the tables below of the Dow and S&P 500. As you can see during a Secular Bull Market the Average Annual Return (highlighted in red) is considerably higher than during a Secular Bear Market (highlighted in blue). Thus the long term Buy and Hold strategy that worked well in the 1980’s and 1990’s for investors may have not worked very well during the Secular Bear Markets of 1906-1921, 1929-1949 and 1966-1982.

Secular Bear Markets vs Secular Bull Markets and Dow Performance

The big question is now are we in the beginning stages of a 4th Secular Bear Mark

et which started in 2000. The average length of the previous 3 Secular Bear Markets was 18 years with a minimum of 16 years and a maximum of 21 years. Thus if you add 18 years to the year 2000 and take + or - 3 years on either side then the next Secular Bull Market may not begin until sometime in the 2015 to 2021 time period if we are now entering a 4th Secular Bear Market. However I would like to point out that even in a Secular Bear Market there can still be Bull Markets lasting a year or two as the longer term charts of the Dow show below.

Notice after the Secular Bull Market of 1922-1928 which was followed by a Secular Bear Market from 1929-1949 that the Dow still had impressive gains during the early to mid 1930s (points A to B) before going through another Bear Cycle prior too and during World War II (points B to C). This was then followed by another Bull Cycle from 1943-1946 (points C to D). However from the early part of 1937 (point B) until the end of 1949 (point E) the Dow virtually had a net gain of 0% as its basic overall pattern was a series of up and down movements which pretty much cancelled each other out.

Meanwhile after the Secular Bull Market from 1950-1965 the Dow once again went through another Secular Bear Market from 1966-1982. Notice after the Dow peaked in early 1966 (point F) that it had a lot of upward and downward movements from 1966 through 1982 but it basically went nowhere and actually was lower at the end of 1982 (point G) versus its peak in early 1966 (point F).

Looking at the current chart of the Dow shows that it has been exhibiting a choppy pattern similar to previous Secular Bear Market environments after experiencing a Secular Bull Market from 1983-1999. One has to wonder during the next 10 years or so whether the Dow will continue to exhibit a similar pattern that occurred from the mid 1960’s through the 1970’s in which it had a lot of downward and upward moves but the overall net gain was negligible.

Even if we go through another Secular Bear Market over the next several years there will still be plenty of smaller Bull Markets and if taken advantage of properly will still lead to some excellent investment opportunities in the future.

A Pivot Point resides near the top of a trading range as a stock is developing a Handle. The proper time to buy a stock is when it begins to break above its Pivot Point and is accompanied by increasing volume.

Here are some Examples

EBAY formed a 1 year Cup and then developed a 6 week Handle with a trading range between $65 and $71. The top of the trading range was near $71 which acted as the Pivot Point for EBAY. EBAY eventually broke above its Pivot Point in early January accompanied by an in increase in volume (point A).

Another example is shown by ERES which formed a 1 1/2 year Cup followed by the development of an 8 week Handle with a trading range between $10 and $11. In this case the top of the trading range was near $11 which served as the Pivot Point. ERES broke above its Pivot Point in April of 2002 accompanied by very strong volume (point B).

Another example is of HITK which formed a 1 1/2 year Cup followed by a 5 week Handle (point C) with a trading range between $9 and $11. In this example the top of the trading range was near $11 which served as the Pivot Point. HITK eventually broke above its Pivot Point in November of 2002 accompanied by an increasing in volume as well (point D).

As you can see the best time to purchase a stock is when it begins to break out of a favorable chart pattern such as the "Cup and Handle" and above its Pivot Point accompanied by increasing volume.

During my first year as a local (independent trader) on the floor of LIFFE, I bought and sold 8804 FTSE futures contracts, about 40 contracts per day on average. The result was a loss of £61,620 or -£267 per trading day. I was profitable on 55% of days with an average gain of £1009, my average loosing day was -£1780. My biggest one day gain was £7730 and my biggest loss -£12,426.

As you can probably imagine, this was a difficult time for me. I was trying to work out how to make money consistently. It was the consistency that seemed so hard to find. As you can see I was having a regular experience of making money, what was killing me were my losses. It seemed that every time I got ahead by £5-6000 over a period of a week or two, I would lose it all and a few thousand more in the space of a couple of days.

At the time I was too unhappy with my performance to be willing to spend any time analysing my results. If I had I would have discovered that during this period all I needed to do to go from a loss of £61,620 to a small profit would have been to avoid just 10 trading days. Those 10 days cost me a total of £69,169!

At the end of this period I was so frustrated, fed up and stuck that I decided to quit trading and return to a more secure career. It only took me a few weeks to abandon this plan and return to trading. I felt sure that I had the raw talent to become a consistently successful trader, what I needed, I reasoned, was some support. Support to stop me having the huge losing days that were crippling me financially.

I approached a firm I knew that backed traders on the floor and they agreed to back me with £20,000 of trading capital. We would split profits 60:40 and I was set an initial daily loss limit of £500. If I hit my £500 limit the firm’s floor manager would come and tell me to go home. The third day trading I lost about £3500 and nothing happened, no one came to ask me to stop trading. I felt very foolish, but continued to trade for the remainder of the week while avoiding any contact with the floor manager.

The following Monday (the week’s losses had totaled about £5000) I got a message to meet with the director with whom I had made the agreement (it transpired he had been away the previous week). I was sure that he was going to say that the deal was off. Instead, to my surprise, he told me how important it was that he could trust me, he needed to know that when the market was volatile he could trust me not to be racking up big losses. He suggested that I start afresh. Needless to say I was both relieved and grateful. So I went back to the trading pit that morning with the determined intention to not loose more that £500.

The next two weeks turned out to be one of the toughest periods of my trading career and one of the most rewarding. Stopping when I was down was hard. I realised that what had been at the root of my large losses was my inability to accept loosing at all. To me loosing was unacceptable. Such was my intolerance for loss that I lost for ten consecutive days. But as the days progressed, even though I continued to loose £500 a day, I found my mood lifting. I actually started to feel OK about loosing as long as it was within my limit.

At the end of this 10-day period of losses a seeming miracle happened; I started to make money. My target was to get to +£1000 and then not give back more than 20% of my gain. So when I had a profitable day I was making between £800 and £2000, for an average of about £1200. Not only did I start to make money, I did so for 15 days in a row, three entire weeks without a loss.

This marked the beginning of a new era of trading for me. In retrospect, I believe that I had been trading scared, scared that I was really a looser. The two weeks of rigidly sticking to my loss limit caused me to revaluate myself. I started to feel good about myself for sticking to my limit. Before it was bad if I lost money, now it was only bad if I lost more than my limit. Before, I never knew whether I was going to make £1000 or loose £5000; now I knew that the worst case was a loss of £500 and that was OK. I started to see that sticking to my trading limits was a sign of strength and my confidence started to rise.

Looking back at my first year’s loosing streak, if I had restricted my losing days to -£500 my loss of £61,620 would have turned into a profit of £83,525. Not only that, I think that had I been sticking to a loss limit during that period, my confidence would have been that much greater and my percentage of profitable days would also have been higher.

Scared money never wins, as the saying goes. If we are scared what are we scared of?

"Our deepest fear is not that we are inadequate. Our deepest fear is that we are powerful beyond measure. It is our light, not our darkness that most frightens us. We ask ourselves: "Who am I to be brilliant, gorgeous, talented, fabulous?" Actually, who are we not to be? You are a child of God. Your playing small doesn’t serve the world. There’s nothing enlightening about shrinking so that other people won’t feel insecure around you. We are all meant to shine, as children do. We were born to make manifest the glory of God that is within us. It’s not just in some of us; it’s in everyone. And as we let our own light shine, we unconsciously give other people permission to do the same. As we’re liberated from our own fear, our presence automatically liberates others." Nelson Mandela

Whatever is at the root of our fear, in order to become consistently successful traders, we have to overcome it by developing trust in ourselves, trust that we will always act in our own best interest. When we trade fearfully, we undermine ourselves and end up taking the very action that confirms our fear. The question is how to develop an unshakeable trust in ourselves?

We develop trust in others through repeated experience of them acting in ways that inspire trust. In the same way we develop trust in ourselves as traders by building up a history of action that supports our goal to become consistently successful traders. The more frequently we adhere to our own trading plan and limits the greater our self-trust. Now this sounds like a catch 22 situation, if you find like I did that you cannot help yourself, how do you start to develop self-trust through right action?

In a way I was lucky, my back was against the wall, I knew that if I broke my limit I would be out. So I had to stick to my limit and in doing so I gave myself the opportunity to confront and finally reject my fear of being a loser. To go from being a net loosing trader to a consistently profitable one, we need to set ourselves achievable targets of behavior. My problem was allowing loosing days to turn into huge losing days, so to set myself the objective of stopping trading for the day when I was down £500 was appropriate for me. For others the primary problem can be the resistance to taking a trade when a signal comes up, be it intuitive or mechanical. An appropriate exercise would be to take a simple mechanical trading system (it does not have to be much good, break even would do) and set the goal of taking the next 10 signals without hesitation, regardless of how you feel.

We need to build up our trading skills one at a time, when we are confident we can cut our losses we can move onto execution, then we can work on holding on to profitable trades etc. Tennis stars don’t become stars just through competition; they hone their skills one by one on the practice court and they continue to practice throughout their careers. As traders we need to identify the individual skills we need to develop and focus on them one by one. Someone new to tennis does not expect to go out and win competitions straight away, they know they will have to spend a fair amount of time practicing and learning first. Short term trading, like tennis, is skill based, and those skills can be identified, practiced and mastered

Many investors fail to use a Stop Loss Order to protect themselves in case they end up buying a stock at the wrong time. In his book "How to Make Money in Stocks" William O’Neil states even the most successful investors maybe wrong about 50% of the time when choosing stocks to invest in. The key is to cut your losses early when a stock fails to follow through to the upside and minimize your losses. However many investors fail to do so and allow a small loss to turn into a much bigger one by not using a proper Stop Loss Order.

A good rule of thumb is to never let a stock drop more than 8% below the Pivot Point when it reverses to the downside after initially trying to breakout. Thus this is where a Stop Loss Order would come into play.

Let’s look at a specific example. CLZR first formed a Double Bottom pattern in 2002 and then traded sideways for 12 weeks while developing a Handle. While forming the Handle CLZR traded roughly between $6 and $7 with its Pivot Point near $7. CLZR then broke out strongly in February and above its Pivot Point (point A) and rose to $10 very quickly. In this case a proper Stop Loss Order should have been placed 8% or so below the Pivot Point of $7 near $6.50.

After rising very quickly and stalling out near the $10 level CLZR had then completed the right side of a 2 year Cup. Over the next 10 weeks CLZR traded sideways again between $7.50 and $9.25 while developing a Handle. Then in April CLZR broke out again and rose to $12.50 rather quickly. In this case if you had missed the original breakout in February you got a second chance in April and should have placed a Stop Loss Order 8% or so below CLZR Pivot Point of $9.25 near $8.50.

Remember its always important to use a Stop Loss Order just in case a stock doesn’t perform the way you think it will. Allowing a small 8% loss to turn into something much bigger can be avoided by using a proper Stop Loss Order as the example below shows.

Imagine if you would have bought AMZN right before it peaked in the late part of 1999 (point A) near $120 and failed to use a proper Stop Loss Order once it began to sell off. If you had invested $5000 in it during the latter half of 1999 and used an 8% Stop Loss Order you would have lost only $400 as it sold off. If you had held on to it and rode it down to the $10 level which occurred in the Fall of 2002 you would have lost over $4000 instead.

What are the differences between trading and gambling?

Many people think that trading is similar to gambling. Is this really the case?

For example, let’s take a look at Black Jack. If you start with $10,000 gambling capital, placing bets of $100 per hand and play 100 hands per day, how long will you last? In the game of Black Jack, with Las Vegas Strip rules, a casino has a built-in advantage of 1.5% over the player in the long run. That means that on average, a player will lose $1.5 per any $100 he bets with. After 100 hands, on average he’ll be down $150. Starting with a capital of $10,000 a player would last about 67 gambling days. That is very similar to the previously described trading scenario. In such case I would choose gambling because at least I would be losing my money in a more pleasant environment.

I chose Black Jack for our example because it is the only casino game in which it is possible for a skilled player to increase his odds to such extent as to be able to beat the House in the long run. A skilled counter can obtain advantage of up to 1.5% per hand over the House in the long run. That means that such a player playing 100 hands per day and average hand being $100 could double his gambling capital of $10,000 in less than 50 days. Similar odds apply to trading stocks, with more potential for profit and less chances for being kicked out of a casino. In order to make it work for you, we’ll need to get the odds on your side. Now lets look at how we can extract as much profits from our trades as possible.

Understanding Trailing Stops

Once you are in the trade and the price has started moving in your direction, you need to extract as much profit as possible. Not being able to do so will make you a losing trader in the long run. How can a trader lose if he only takes small profits at a time? Profit is profit, isn’t it? Not exactly… Profit of $550 is not the same as a profit of $850. If such profits are followed by three losses of $200 each, profit of $550 will become $50 loss, while profit of $850 will become $250 win. Do you get my point?

Profits are always followed by losses and if the profits are small they will not make up for the losses that will eventually and surely follow. However, becoming too greedy can turn a small profit into a loss. This will make you lose money in the long run. The best solution to resolving these conflicts is to use trailing stops.

As the name says, trailing stop follows the stock price that is moving in your direction. For example, let’s say that we have bought two S&P 500 contracts at 875. We will automatically put our stop loss at 1 point below the support line or if that is over our 4% limit we will put our stop loss at 871. The price starts to move upwards and reaches 876. We will now move our stop loss at $871.75. For every one point move in our direction we will move our stop loss 0.75 points up (or down if we were in a shortsell trade).

However if we were trading two contracts and the price has in our example hit 879 (4 points profit for ES or 10 points for NQ) we would sell one contract to protect our profit and for the remaining contract we would use trailing stop.

Trading together with a friend can have its advantages. If one of you has more experience and the other more money, you can help your friend through your experience and he can help with margins. Together, you can trade larger size and perhaps make more profits. However, unless you both agree to the same line of action and what the possible contingencies might be, it is essential that you decide which of you is to execute the trades. It is more difficult reaching trading decisions together than on your own.

If you haven’t decided on the contingency measures in advance you’ll find yourself arguing and disagreeing in the middle of a trade going against you when timely action is of the essence. It can be quite disheartening and dangerous.

If you are not absolutely sure about your partner, and you don’t agree with the way he trades, you are better off trading on your own.

Take for example an instance where the order placed was ambiguous and the broker executed it twice. The traders accepted the mistake and then the market moved against them. The partner with the greater margins but less experience was in charge of execution. He placed the order before the market opened to roll the position out. The market moved against him, he covered the position at three times the premium received and then the market corrected. He was unable to get the other side because he couldn’t watch intraday.

Trading is a business! You must be totally prepared in terms of having a business plan, knowing how to place orders, and being on top of them from beginning to end. Even then things can go wrong, but being unprepared can lead to disaster. The smallest details must be thought of and prepared in advance, but mistakes and oversights still happen.

I came across an interesting concept. The path to enlightenment involves conquering five human weaknesses: greed, fear, ignorance, pride and jealousy. We should be all familiar with the first two, which cause much grief to traders, but the last three can be a big problems, too, so it’s worth pondering on them. Human weaknesses always show up to undermine one’s trading.

Greed makes people stay in a trade too long, or trade too big a size. Fear makes one get out of winning trades too early. Ignorance makes people commit innumerable mistakes. Pride doesn’t allow one to admit one is wrong and often, small losses are allowed to turn into huge losses because one doesn’t want to accept one is wrong. Jealousy can make one trade in a subjective manner.

A detached attitude is a great asset in trading. Trading is war and it is essential that you execute a pre-planned line of action flawlessly and unemotionally. You must be flexible and let things (that are now second nature) take their course. Be like an outside passive observer.

That is why it is so important to be at your best when trading. You must have all possible things on your side. You need to feel totally on top of it, prepared, in top physical shape,

Wrong! The perennial questions are, "Should I buy? Should I sell?" All too many traders focus their efforts on identifying buy and sell signals. In fact, that’s what most trading books consist of-some way to find buy and sell signals. Trading systems are usually all about "where to get in."

The research and analysis traders do is geared towards reaching the goal of getting that magic "base line" directive to guide their actions. How ignorant can you be?

Any successful, experienced trader will tell you that although properly identifying buy/sell signals is important, it’s not the key to being successful. Instead, the way you manage each trade is what will determine your success.

Traders who take the baseline approach tend to believe that the success of their trading activity is dependent on following the right buy/sell signals at the right time. Clearly, it’s important that a trader be able to understand the process of generating signals and to use the methods involved. Realistically though, almost any trader can find a way to generate signals (whether using technical methods already out there, coming up with their own system, or using their platform’s automated signal generation tools).

Any successful, experienced trader will tell you that your trade doesn’t begin and end with a buy or sell. There’s a trade management process involved. For each trade you make, you’re making a group of decisions. The way you manage and time those decisions is what will determine the success of your trade.

Let’ say two traders get the same signal at the same time and act on it. One’s trade may result in profits while the other’s results in losses. How is this possible? It can occur because each trader made a different combination of decisions throughout the course of the trade. The decisions might include scaling in and/or out of the trade, using or not using trailing stop losses, setting or not setting profit objectives prior to entry, patience or lack thereof, etc. The trader who made the most effective overall combination of decisions will have the better trade results in the end. Of course, there are times when pure chance, gives the better result to the worst trader.

It’s very important to regard trading as a process, and to understand that as a trader your efforts need to be focused on the activity of trading itself, as opposed to getting a quick base line answer. Because there are many things to take into consideration in making your trades successful, it’s essential that you educate and train yourself in all the different areas. Learn how to develop better trading plans and analysis methods, and then learn how to apply what you’ve developed to the process of a making a trade-from the original impulse to enter or stay out of a trade to the control of your thought processes and emotions in managing that trade.

Stop placement is where we separate the kids from the adults.

Stop placement is the sole responsibility of you as the manager of your trading business. It is one buck that you cannot pass.

You are the end of the line when it comes to placing stops.

Let me show you why you, and only you, can decide where to place the stop. There are several considerations:

The size of your margin account has the greatest effect on stop placement. When you look at a trade and see where the stop should go, or where you would like it to go, you then have to look at the size of your margin account and determine whether or not you can even consider the trade.

Your comfort level. Although you may have sufficient margin to place the stop where you would like to, and although the stop is logical for the trade, you may not feel comfortable with the stop being so far away (or even so close), and so you will decide not to take the trade with the stop far away, or move the stop back if it appears too close.

Volatility. You must take into account market volatility when placing your protective stop. If a market that normally ticks two ticks at a time suddenly begins to tick five ticks at a time, you must certainly take the level of volatility into consideration. You may find out that you have to place your stop too far away for the size of your bank or your comfort level.

When you use mental stops, there are two other considerations which you must ponder when placing your protective stop. They are: Your speed in placing the order, and the speed at which your broker can place the order. Let’s look at each.

The speed at which you can place the order. This depends upon how fast you think on your feet. There are three factors here: Perception, decision, and action. How long does it take you to perceive that NOW is the time to pick up the phone and place your stop in the market? Or, NOW is the time to enter your stop via your electronic trading platform?

Then, once you make the perception, how long does it take you to decide to do something about what you have perceived? Are you quick to decide upon your perceptions? Finally, are you quick to act once you have made a decision?

Some of us are very quick in all three areas. Some of us are too slow to utilize mental stops. Only you can tell from the experiences you are having in the market whether or not you are quick enough to use mental stops.

Those of you who have been trading for a while will be familiar with Pivot Points. During this lesson I want to go over how to find a Pivot Point and also a slightly different method of using them. First let’s look at how you calculate a Pivot Point.

Using a bar chart you will observe that each bar has an Open, High, Low and Close. This information represents all price activity during that particular period.

In the case of the following example, we shall use a daily bar. To calculate the pivot point all you need to do is add the High, Low and Close. Once this has been done you next divide the total by three, e.g. the cash FTSE on the 2nd May 02 had a High of 5192.70, a low of 5125.50, and a close of 5174.10. If you add the three together, you get 15492.3. You then divide that total by three to get a Pivot Point of 5164.10.

OK, so far so good, but what do you do with this information? Well, one technique I like to use intra day is to use the pivot point as a trend indicator. We already know that the Pivot Point for the 2nd May was 5164.10 and we will use this the next day as an intra day trend indicator.

If the price is above 5164.10, then I would only be long and if it were below 5164.10, I would only be short.

As price can fluctuate around any given point I also add a further proviso. If I have support close to 5164.10, I will first wait for the price to pass through 5164.10 and support before entering short. If I have resistance close to 5164.10, I will first wait for the price to move through the Pivot Point and resistance before entering long.

This method becomes even more powerful when the Pivot Point is close to the opening price. If, for example, the opening price is 5174.10, the Pivot Point is 5164.10, and I eventually go short at 5155, I can stay short the whole day as long as it does not go above the Pivot Point.

Once in a position I normally have a very tight stop to begin with and then will follow the market with a trailing stop to lock in profits.

Another way I like to add Pivot Points to my analysis is for more long-term projections. I will use the Pivot Point of a Yearly, Monthly and Weekly chart. In this case it would be the High, Low and Close of the previous Year, Month and Week.

I like to think of the weekly Pivot Point as the short-term trend, the monthly as the medium term trend and the Yearly as the long-term trend. I find this particularly useful in Spot Forex. If I am below the yearly, monthly and weekly Pivot Point, I know I am in a strong down trend and I can scale into multiple positions over time. The same holds true for long positions.

The point is there are many ways to determine trend. You can also use Pivot Point to find potential Support and Resistance, which we will cover in later lessons.

Experiment with Pivot Points and see if it suits your trading style. At the very least it is always handy to know where they are and it may help you decide which side of the market you should be trading from.

Good Trading

The whole concept of odds and probabilities is a subject that most beginner traders avoid, but is absolutely one of every professional trader’s secrets for success. Trading the financial markets is all about managing risk, nothing is 100% accurate or works 100% of the time. There is always a certain chance, certain odds, certain probability that a trade will work or wont work. Even if a trading system generates 99% chance of success, there is still that 1% chance of failure. Nothing in trading is black or white, everything is somewhere in the gray. It is the job of the trader to determine how gray the trade is, what are odds of success. The trader can then adjust their trading based on the probability of the specific trade and the probability of the trading system that he uses. By figuring out exact odds of success, the trader can figure out his edge and maintain it.

Why Odds and Edge?

Anyone that has ever been to Las Vegas can see the money that the casinos spend to lure the gambler into their casino. The casinos make their money, an enormous amount of money, by maintaining their edge. In the collection of all games that a casino runs, they still maintain around 4.5% edge. That means that out of every dollar that is brought in to the casino, 4.5 cents stay there. Some people hit the jack pots, some people lose everything they have, but the casino, on average, makes 4.5%. For the casinos, it is not gambling, it is a game of odds, probabilities and they know their edge. The more gamblers come in, the more money they bring with them, the more the casino makes, as long as they maintain their edge.

In trading, the trader runs their own casino. If a trader wins 80% of the time, makes $200.00 every time he wins and loses $100.00 every time he loses, on average the trader makes $140.00 per trade. As long as the trader maintains his ratios, his edge, he will make, on average, $140.00 every time he executes a trade.

This is a very important statistic for a trader. Being aware of these numbers allows traders to weather draw downs, stick to their system, eliminating hesitation and managing their trading correctly.

Odds and Your System

Every trader wants to make money. Even the best analysis, best system in the world will have losing trades, it is just part of the business, there is no 100% success. After a long testing period, every trader should evaluate their statistics to find their edge. What percentage of trades are profitable? What is the average winning trade? What is the average losing trade? What is the average profit per day?

Testing a trading system is a gradual process, as many factors can affect results. By paper trading for a long period of time, a beginner trader can evaluate their trading system. The next step is trading minimum size positions and testing system results again. Keeping a trading diary and tracking performance as the system develops can establish the system’s edge and odds of success. These numbers will help the trader become a business and not a gambler.

Odds and Your Individual Trades

Every trading system has certain conditions or parameters that are required before a trade is executed. Depending on the structure of the trading system, there can be more parameters or less parameters. The more conditions are true, the higher the odds of a successful trade. It is almost impossible to find a trade that has all conditions aligned, almost all trades are less than perfect.

Knowing the trade’s odds can help a trader evaluate risk and adjust position accordingly. If only 80% of conditions in the trading system exist, the trade has less odds of success than a trade that has 100% of conditions and should be traded differently.

If all trading conditions exist, if all indicators are lined up, the trade has certain odds of success. If not all indicators are lined up correctly, the trade has lower odds of success. Below a certain level of odds, the trade should not be taken.

Thinking in Odds

Most traders have serious problems thinking in odds because it is against our nature to take on a position without being 100% sure that it will be a success. Losing hurts, it is painful, taking a position knowing that there is a chance of loss is usually avoided. Traders want to "know" what is going to happen and therefore look for the black and white in trading. Black and white do not exist in trading.

A trade can be right and still lose. All indicators can be aligned and the trade can still lose. Even if the system is 99% accurate, there is still a chance that the trade will be a loss. Most traders are unable to accept this and it causes frustration. By learning to think in odds, a trader can both vary their trading according to odds of success and accept losing trades a lot easier.

Shay Horowitz has been a successful day trader advisor for over 10 years. Currently he works as an advisor to other traders and has helped hundreds of clients bring in an average 15% profit per trade.

I came across this article that I thought everyone should read. Even though it was published a long time ago, the information is just as relevant today.

I have always used a bit of Gann’s trading methods in my own trading - especially to determine trend. Love him or hate him, it would be a brave trader that would deny that Gann was one of the most influential traders of the last century.

The following article appeared in the December 1909 issue of The Ticker & Investment*Digest.

Some time ago the attention of this magazine was attracted by certain long pull Stock*Market predictions which were being made by William D. Gann. In a large number of cases Mr Gann gave us, in advance, the exact points at which certain stocks and commodities would sell, together with prices close to the then prevailing figures which would not be touched.

For instance, when the New York Central was 131 he predicted that it would sell at 145 before 129. So repeatedly did his figures prove to be accurate, and so different did his work appear from that of any expert whose methods we had examined, that we set about to investigate Mr Gann and his way of figuring out these predictions, as well as the particular use which he was making of them in the market.

The results of this investigation are remarkable in many ways. It appears to be a fact that Mr Gann has developed an entirely new idea as to the principles governing stock market movements. He bases his operations upon certain natural laws which, though existing since the world began, have only in recent years been subjected to the will of man and added to the list of so-called modern discoveries.

We have asked Mr Gann for an outline of his work, and have secured some remarkable evidence as to the results obtained therefrom. We submit this in full recognition of the fact that in Wall Street a man with a new idea, an idea which violates the traditions and encourages a scientific view of the Proposition, is not usually welcomed by the majority, for the reason that he stimulates thought and research. These activities the said majority abhors.

Mr Gann’s description of his experience and methods is given herewith. It should be read with recognition of the established fact that Mr Gann’s predictions have proved correct in a large majority of instances.

"For the past ten years I have devoted my entire time and attention to the speculative markets. Like many others, I lost thousands of dollars and experienced the usual ups and downs incidental to the novice who enters the market without preparatory knowledge of the subject.

"I soon began to realise that all successful men, whether Lawyers, Doctors or Scientists, devoted years of time to the study and investigation of their particular pursuit or profession before attempting to make any money out of it.

"Being in the Brokerage business myself and handling large accounts, I had opportunities seldom afforded the ordinary man for studying the cause of success and failure in the speculations of others. I found that over ninety percent of the traders who go into the market without knowledge or study usually lose in the end.

"I soon began to note the periodical recurrence of the rise and fall in stocks and commodities. This led me to conclude that natural law was the basis of market movements. I then decided to devote ten years of my life to the study of natural law as applicable to the speculative markets and to devote my best energies toward making speculation a profitable profession. After exhaustive researches and investigations of the known sciences, I discovered that the law of vibration enabled me to accurately determine the exact points at which stocks or commodities should rise and fall within a given time. The working out of this law determines the cause and predicts the effect long before the street is aware of either. Most speculators can testify to the fact that it is looking at the effect and ignoring the cause that has produced their losses.

"It is impossible here to give an adequate idea of the law of vibrations as I apply it to the markets. However, the layman may be able to grasp some of the principles when I state that the law of vibration is the fundamental law upon which wireless telegraphy, wireless telephone and phonographs are based. Without the existence of this law the above inventions would have been impossible.

"In order to test the efficiency of my idea I have not only put in years of labour in the regular way, but I spent nine months working night and day in the Astor Library in New York and in the British Museum of London, going over the records of stock transactions as far back as 1820. I have incidentally examined the manipulations of Jay Gould, Daniel Drew, Commodore Vanderbilt & all other important manipulators from that time to the present day. I have examined every quotation of Union Pacific prior to & from the time of E.H. Harriman, Mr Harriman’s was the most masterly. The figures show that, whether unconsciously or not, Mr Harriman worked strictly in accordance with natural law.

"In going over the history of markets and the great mass of related statistics, it soon becomes apparent that certain laws govern the changes and variations in the value of stocks, and that there exists a periodic or cyclic law which is at the back of all these movements. Observation has shown that there are regular periods of intense activity on the Exchange followed by periods of inactivity. Mr Henry Hall in his recent book devoted much space to ’ Cycles of Prosperity and Depression’, which he found recurring at regular intervals of time. The law which I have applied will not only give these long cycles or swings, but the daily and even hourly movements of stocks. By knowing the exact vibration of each individual*stock I am able to determine at what point each will receive support and at what point the greatest resistance is to be met.

"Those in close touch with the market have noticed the phenomena of ebb and flow, or rise and fall, in the value of stocks. At certain times a*stock will become intensely active, large transactions being made in it; at other times this same stock will become practically stationary or inactive with a very small volume of sales. I have found that the law of vibration governs and controls these conditions. I have also found that certain phases of this law govern the rise in a stock and an entirely different rule operates on the decline.

"While Union Pacific and other railroad stocks which made their high prices in August were declining, United States Steel Common was steadily advancing. The law of vibration was at work, sending a particular stock on the upward trend whilst others were trending downward. "I have found that in the stock itself exists its harmonic or inharmonious relationship to the driving power or force behind it. The secret of all its activity is therefore apparent. By my method I can determine the vibration of each stock and also, by taking certain time values into consideration, I can, in the majority of cases, tell exactly what the stock will do under given conditions.

"The power to determine the trend of the market is due to my knowledge of the characteristics of each individual stock and a certain grouping of different stocks under their proper rates of vibration. Stocks are like electrons, atoms and molecules, which hold persistently to their own individuality in response to the fundamental law of vibration. Science teaches that ’an original impulse of any kind finally resolves itself into a periodic or rhythmical motion; also, just as the pendulum returns again in its swing, just as the moon returns in its orbit, just as the advancing year over brings the rose of spring, so do the properties of the elements periodically recur as the weight of the atoms rises.’

"From my extensive investigations, studies and applied tests, I find that not only do the various stocks vibrate, but that the driving forces controlling the stocks are also in a state of vibration. These vibratory forces can only be known by the movements they generate on the stocks and their values in the market. Since all great swings or movements of the market are cyclic, they act in accordance with periodic law.

"Science has laid down the principle that ’the properties of an element are a periodic function of its atomic weight’. A famous scientist has stated that ’we are brought to the conviction that diversity in phenomenal nature in its different kingdoms is most intimately associated with numerical relationship. The numbers are not intermixed accidentally but are subject to regular periodicity. The changes and developments are seen to be in many cases undulatory.’ Thus, I affirm every class of phenomena, whether in nature or on the*stock*market, must be subject to the universal law of causation and harmony. Every effect must have an adequate cause.

"If we wish to avert failure in speculation we must deal with causes. Everything in existence is based on exact proportion and perfect relationship. There is no chance in nature, because mathematical principles of the highest order lie at the foundation of all things. Faraday said, ’There is nothing in the universe but mathematical points of force’.

"Vibration is fundamental : nothing is exempt from this law. It is universal, therefore applicable to every class of phenomena on the globe. Through the law of vibration every stock in the market moves in its own distinctive sphere of activities, as to intensity, volume and direction; all the essential qualities of its evolution are characterised in its own rate of vibration. Stock, like atoms, are really centres of energy; therefore, they are controlled mathematically. Stocks create their own field of action and power: power to attract and repel, which principle explains why certain stocks at times lead the market and ’turn dead’ at other times. Thus, to speculate scientifically it is absolutely necessary to follow natural law. "After years of patient study I have proven to my entire satisfaction, as well as demonstrated to others, that vibration explains every possible phase and condition of the market."

In order to substantiate Mr Gann’s claims as to what he has been able to do under his method, we called upon Mr William E. Gilley, an Inspector of Imports, 16 Beaver Street, New York. Mr Gilley is well known in the downtown district. He himself has studied stock*market movements for twenty-five years, during which time he has examined every piece of market literature that has been issued & procurable in Wall Street. It was he who encouraged Mr Gann to study the scientific and mathematical possibilities of the subject. When asked what had been the most impressive of Mr Gann’s work and predictions, he replied as follows :

"It is very difficult for me to remember all the predictions and operations of Mr Gann which may be classed as phenomenal, but the following are a few.

"In 1908 when the Union Pacific was 168-1/8, he told me it would not touch 169 before it had a good break. We sold it short all the way down to 152-5/8, covering on the weak spots and putting it out again on the rallies, securing twenty-three points profit out of an eighteen point wave.

"He came to me when United States Steel was selling around 50, and said, ’This steel will run up to 58 but it will not sell at 59. From there it should break 16 points.’ We sold it short around 58 with a stop at 59. The highest it went was 58. From there it declined to 41-17 points.

"At another time, wheat was selling at about 89c. He predicted that the May option would sell at $1.35. We bought it and made large profits on the way up. It actually touched $1.35.

"When Union Pacific was 172, he said it would go to 184-7/8 but not an eighth higher until it had a good break. It went to 184-7/8 and came back from there eight or nine times. We sold it short repeatedly, with a stop at 185, and were never caught. It eventually came back to 17.

"Mr Gann’s calculations are based on natural law. I have followed his work closely for years. I know that he has a firm grasp of the basic principles which govern stock market movements, and I do not believe any other man can duplicate the idea or his method at the present time.

"Early this year, he figured that the top of the advance would fall on a certain day in August and calculated the prices at which the Dow Jones Averages would then stand. The market culminated on the exact day and within four-tenths of one percent of the figures predicted."

"You and Mr Gann must have cleaned up considerable money on all these operations", was suggested.

"Yes, we have made a great deal of money. He has taken half a million dollars out of the market in the past few years. I once saw him take $130, & in less than one month run it up to over £12,000. He can compound money faster than any man I have ever met."

"One of the most astonishing calculations made by Mr Gann was during last summer [1909] when he predicted that September Wheat would sell at $1.20. This meant that it must touch that figure before the end of the month of September. At twelve o’clock, Chicago time, on September 30th (the last day) the option was selling below $1.08, and it looked as though his prediction would not be fulfilled.

Mr Gann said, ’If it does not touch $1.20 by the close of the market it will prove that there is something wrong with my whole method of calculation. I do not care what the price is now, it must go there.’ It is common history that September Wheat surprised the whole country by selling at $1.20 and no higher in the very last hour of trading, closing at that figure."

So much for what Mr Gann has said and done as evidenced by himself & others. Now as to what demonstrations have taken place before our representative :

During the month of October, 1909, in twenty-five market days, Mr Gann made, in the presence of our representative, two hundred and eighty-six transactions in various stocks, on both the long and short side of the market. Two hundred and sixty-four of these transactions resulted in profits ; twenty-two in losses.

The capital with which he operated was doubled ten times, so that at the end of the month he had one thousand percent of his original margin. In our presence Mr Gann sold Steel Common at 86, saying that it would not go to 86. The lowest it sold was 86-1/8.

We have seen him give in one day sixteen successive orders in the same stock, eight of which turned out to be at either the top or the bottom eighth of that particular swing. The above we can positively verify.

Such performances as these, coupled with the foregoing, are probably unparalleled in the history of the Street.

James R. Koene has said, "The man who is right six times out of ten will make a fortune." He is a trader who, without any attempt to make a showing, for he did not know the results were to be published, established a record of over ninety-two percent profitable trades.

Mr Gann has refused to disclose his method at any price, but to those scientifically inclined he has unquestionably added to the stock of Wall Street knowledge and pointed out infinite possibilities.

We have requested Mr Gann to figure out for the readers of the Ticker a few of the most striking indications which appear in his calculations. In presenting these we wish it understood that no man, in or out of Wall Street, is infallible.

Mr Gann’s figures at present indicate that the trend of the stock market should, barring the usual rallies, be toward the lower prices until March or April 1910. He calculates that May Wheat, which is now selling at $1.02, should not sell below 99c, and should sell at $1.45 next spring. On Cotton, which is now at about 15c level, he estimates that after a good reaction from these prices the commodity should reach 18c in the spring of 1910. He looks for a corner in the March or May option.

Whether these figures prove correct or not will in no way detract from the record which Mr Gann has already established.

Mr Gann was born in Lufkin, Texas, and is thirty-one years of age. He is a gifted mathematician, has an extraordinary memory for figures, and is an expert Tape Reader. Take away his science and he would beat the market on his intuitive tape reading alone.

Endowed as he is with such qualities, we have no hesitation in predicting that, within a comparatively few years, William D. Gann will receive recognition as one of Wall Street’s leading operators.

Cup and Handle

Favorable Chart Patterns to Look for before Buying a Stock

One of the biggest factors an investor should consider before buying a stock is what type of chart pattern the stock is forming. A company may have great fundamentals but if it has an unfavorable chart pattern then it may not be a good company to invest in. One of the basic chart patterns to look for before investing in a stock is called a "Cup and Handle" pattern. Typically a "Cup and Handle" looks similar to a coffee cup if you were holding the cup in your right hand.

Generally I look for stocks that take 3 Months or more to form a Cup and then develop a Handle for at least 2 Weeks. Some examples are shown below.

AMHC formed a Cup for 14 Months and then developed a Handle for 8 Weeks (point A). AMHC broke out of the Handle in December of 2001 and then preceded to rise from $8 to $37 a share over the next 12 months for a gain of over 400%.

EASI developed a 2 year Cup and then formed a 10 week Handle (point B) before breaking out in August of 2000. EASI then preceded to rise from $12 to $38 a share over the next 12 months for a gain of over 200%.

FRNT developed a 12 Month Cup and then formed an 8 Week Handle (point C) before breaking out in November of 2000. FRNT then preceded to rise from $12 to $26 a share for a gain of over 100% over the next 5 Months.

Finally TARO developed a Cup for 10 Months and then formed a 6 Week Handle (point D) before breaking out in October of 2001. TARO then rose from $17 to $50 a share for a gain of 190% over the next 6 Months.

By focusing on companies with good fundamentals that are breaking out of a favorable chart pattern such as a "Cup and Handle" will allow you to find winning stocks even in a Bear Market environment. The purpose of our site is to help focus investors on those stocks that have good fundamentals which are forming favorable chart patterns such as the "Cup and Handle".

Stocks that have large price gains typically will stair-step upward and form Flat Bases before resuming their up trend. This action may occur several times as a stock remains in an up trend and could last from a few days to several weeks depending on the situation. Flat Bases are characterized by small daily trading ranges with volume being lower than normal. Although it doesn’t happen every time, the longer a stock remains in a Flat Base, the greater the price appreciation may be when the stock breaks out. Lets look at some examples below.

Here is a chart of EMLX. Notice how it formed a Flat Base (small trading range) from July through mid-August and then broke out of the base in on increasing volume (point A). It then formed another Flat Base in September and broke out of this base in early October and skyrocketed from $80 to $200.

Another example of a stock that had a few Flat Bases was KIDE. Notice in May and June the small daily trading ranges with low volume. Then in early July the stock broke out with increasing volume (point A) and went from $10 to $30 by mid-August. KIDE then formed another Flat Base from mid-August though early October and then exploded out of the base on higher volume (point B). The stock then went from $30 to $90 in four weeks. The total gain from July to November was 800% ($10 to $90).

Another example of a stock that was in a Flat Base pattern for a significant amount of time was MCOM. Notice that it traded sideways for at least 3 months before breaking out of the base on strong volume (point A). In this case MCOM went from $10 to $55 in 4 weeks for a gain of 450%.

As you can see, finding stocks that exhibit certain chart patterns (Cup and Handle, Double Bottom and Flat Base) can lead to strong price appreciation when they breakout on strong volume.

There are three favorable Chart Patterns to look for as an investor. They include the "Cup and Handle", "Double Bottom" and "Flat Base". This article will concentrate on the "Double Bottom" pattern which looks like the letter "W" as it develops. An example of a stock which had formed a Double Bottom pattern before breaking out to new 52 week highs was NVR in 2002.

NVR peaked in the Spring of 2001 and then sold off before making its 1st bottom in June (point A). From there it rallied into July (point B) but then sold off again and made a 2nd bottom in September (point C). After making the 2nd bottom NVR then rallied strongly again before stalling out near its previous Spring 2001 high and completed its Double Bottom "W" pattern. NVR then traded nearly sideways for 6 weeks and formed a Handle (H) before breaking out in late January of 2002 accompanied by strong volume (point D).

Each week we look for stocks which are exhibiting favorable chart patterns that have good Sales and Earnings Growth which may break out in the future and undergo significant price appreciation.

If you are experiencing a run of wins, don’t get getting carried away in the flush of success. You don’t want to give it all back.

Over Trading is the greatest single cause for losses in the markets. Whether you are winning now or losing now, ninety-five or more percent of all traders trade too often.

Even a daytrader trading a five minute chart has no need to trade every day nor to trade all day long. You should be filtering your trades so that you take only the best of the best.

Overtrading was a problem that took me a long time to overcome because I did not know what I was looking for. Overtrading is a very serious problem, and veteran traders learn to avoid it. In fact, one way to know if a trader is a mature professional is to know if that trader conquered the problem of overtrading.

The biggest problem with overtrading is that you don’t even know you’re doing it. You can overtrade by trading too many contracts (too much size), trading too often, attempting too many positions or sitting and staring at the screen all day.

One trader I met, who was following a system in twenty markets, received entry signals in fourteen of the twenty. The entry prices were such that probably only two or three of them had any chance of being filled. Yet this trader boldly called in to enter all fourteen orders. After the first six, his broker refused to take any more orders. Had they all been filled, the trader would have been several thousand dollars over margin.

Good traders immediately cut back on size when they are losing or have an equity draw-down.

The total commitment you make on any entry should be relative to a reasonable expectation of the profit potential for that trade. Each trade is different and must be weighed on its merits.

How do you know how many contracts to trade? Certainly you are in a pickle if you always have to trade in single lots. That is not to say that there are never times when a single lot is the right thing to do. It’s okay when you’re scalping , or trading options . However, wherever possible try to trade a least two contracts. You need one to cover costs, and the other to give you a profit.

If it’s late in the day and you are a daytrader who normally does a five lot, perhaps you should use a smaller size due to the fact that the trade hasn’t as much time to develop as one made earlier in the day.

The Double Top pattern is the reverse of a Double Bottom and looks like an upside down "W" or "M" shape. If the second top is being made on lower volume watch out as this maybe a sign a big sell-off is coming. Some examples are shown below.

After KIDE made its first top around $90 in late October it pulled back to around $70 by early November. It then rose back to $90 by mid-November and made a second top (Double Top) on lower volume (point A) before selling off on increasing volume. As you can see KIDE went from $90 to $40 in less than three weeks. If you had a position in this stock and didn’t get out at the first top then you would have had a second opportunity to sell at the second top. Hopefully as an investor you will recognize this pattern and not buy a stock making a second top especially if its on lower volume.

Even the big stocks will show similar patterns as this chart of IBM shows. IBM made the first top in mid-July and then pulled back to around $120. It then rallied back up to its previous high of $140 in mid-September (Double Top) but couldn’t sustain its momentum and sold-off sharply the next several weeks ($140 to $90). Although it’s hard to see, the second top made by IBM in mid-September was on lower volume.

This pattern occurs when a stock rises very quickly out of a base and gets overextended. Stocks in a Parabolic Move can double or triple in value in a very short period of time (usually less than two weeks). As an investor you certainly don’t want to be one of the last passengers on the train and get quickly thrown off. Some examples of this pattern are shown below.

Notice the quick move upward in MCOM back in July. In 5 trading days it went from $20 to $57 for a gain of 185%. Also notice that on the biggest volume day (point A) that it gapped up strongly to $53 and then closed poorly around $41. This was the Climax Top Off the Parabolic Move. As an investor you should have sold this day if you had bought the stock in the $20’s. Meanwhile you certainly should have not bought this stock this day. Notice how the stock eventually pulled all the way back to $20 by early August (point B).

Another example of a Climax Top Off a Parabolic Move is demonstrated by LWIN. This stock skyrocketed from $30 to $95 in 10 trading days for a whopping gain of 217%. The Climax Top occurred on the 10th and 11th days of trading as the volume peaked (point A). The stock then sold off and retreated back quickly to around $42 by late November.

As you can see stocks that go up very quickly, in a Parabolic Move, can also come down just as fast. My advice is if you buy a stock and it doubles or triples in value in a very short period of time (1 to 2 weeks) take your profits and congratulate yourself for a job well done. If you become greedy then you could lose most of your gains as the above examples indicate. Furthermore if your buying a stock in this type of move be very careful and watch out for the Climax Top if the stock is trading on its biggest volume day.